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Sources and Application (Uses) of Funds Statements

Sources and Application (Uses) of Funds Statements

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110



FINANCIAL MANAGEMENT: THEORY AND PRACTICE



INTRODUCTION

This chapter gives a detailed knowledge about the Sources and Applications of funds, with the help of various

case studies and their suggested approaches. We will also learn about the reasons to exclude cash and the various

components in relation to sources and application of funds. The detailed case studies have been mentioned here

to make the students understand the concepts belter.



COMPONENTS OF SOURCES AND APPLICATION OF FUNDS

In Chapter 2, we have seen that the Balance Sheet of any company suffers from some inherent weaknesses and

drawbacks, inasmuch as it presents the financial position of the company as on a given date, i.e. it presents a

static picture, a snapshot, and not a running movie. This feature of a Balance Sheet has prompted some finance

experts to make a sweeping remark like, ‘A Balance sheet conceals more than it reveals.’

Thus, with a view to overcome some of the limiting features of a Balance Sheet, it has been suggested that

we should carefully study the following documents, too, while reading and analyzing any Balance Sheets.

• Schedules

• Notes

• Auditors’ Report (particularly for qualifying/adverse remarks, if any)

• Directors’ Report (of course, with a pinch of salt)

Besides, we must also ask for some further break-ups of the various items, which are vital and necessary.

The tools and techniques of the sources and application of funds statement, or the funds flow/cash flow

analysis, comprise a further improvement upon the ratio analysis technique, pertaining to the Balance

Sheet. This is so, as, instead of presenting the financial position of a company as on a particular date,

it presents the changes in the status and position of the various items, presented in the Balance Sheet,

for the current financial year, as against the previous financial year, i.e. it represents the quantum of

changes (increase or decrease, as the case may be) that may have taken place this year, as compared to

the immediately preceding year.

Not only that. The changes (increase or decrease) have to be computed in terms of the sources of funds

(liabilities) and the application or uses of funds (assets). Now, a question may arise as to what comprises the

sources of funds, and what constitutes the application or uses of funds. In simple terms, the liabilities constitute

the sources of funds, and the assets comprise the application or uses of funds.

Thus, on this very basic and primary principle, an increase in any of the items in the liabilities will constitute

a source of fund. Similarly, an increase in any item of the assets will constitute the application or use of fund.

Conversely speaking, a decrease in any of the items of liabilities will result in the application or use of fund,

and a decrease in any of the items of the assets will result in the source of funds.

With a view to making some further refinement, we may compute the changes in the various items of the

balance sheet under the following two main categories:

• Short-term Sources of Funds, and short-term Application of Funds

• Long-term Sources of Funds and short-term Application of Funds

In other words, the short-term sources and uses of funds will comprise the current liabilities and current

assets, respectively. Accordingly, the long-term sources and application of funds will pertain to the noncurrent liabilities, viz. deferred liabilities, and capital, reserves and surplus (CRS), also known as owner’s

equity (OE), and the non-current assets, viz. fixed assets, miscellaneous assets, and intangible assets)],

respectively.

Further, any increase in the liabilities will go to generate some additional sources of funds. Correspondingly,

any decrease in the liabilities will constitute the application of funds. Similarly, any increase in the assets will

result in the application of funds. Conversely speaking, any decrease in the assets will go on to generate some

additional sources of funds. On the same principle, any increase and decrease in the short-term liabilities (i.e.

current liabilities), will result in short-term sources and uses of funds, respectively. Similarly, any increase



SOURCES AND APPLICATION (USES) OF FUNDS STATEMENTS







111



or decrease in the short-term assets (i.e. current assets) will result in short-term application and sources of

funds, respectively. The same principle will hold good in relation to the long-term liabilities, i.e. non-current

liabilities, viz. deferred (Time) liabilities and owners equity (OE or CRS) as also the long-term assets, i.e. noncurrent assets (viz. fixed assets, miscellaneous assets, and intangible assets].

Now, let us take some illustrative examples.

In case there is an increase or decrease in the level of working capital loan or other short-term bank

loan, this year, as against the previous year, it will constitute an item to be shown as short-term sources

and short-term uses of funds, respectively. Correspondingly, any increase or decrease in the level of the

inventories of raw materials or finished goods will constitute the short-term uses and short-term sources

of funds, respectively.

This is so because, an increase in the level of short-term bank loans will mean that more funds have been

made available to the company. Similarly, a decrease in the level of short-term bank loan means that some

amount of bank loan has been paid back, which, means that an outflow of funds or application (use) of funds

has taken place.

Similarly, an increase in the level of inventory will mean that there has been some outflow of funds towards

the purchase and storing of some more items of inventories, which means that some additional outflow or

application (use) of funds has taken place.

Correspondingly, a decrease in the level of inventories means that some items of inventories have been

consumed or shed off, resulting in the generation of funds, which means that such a decrease in the level of

inventories has resulted in the generation of funds or source of funds.

The same logic will be true for long-term sources and uses of funds, too, i.e. an increase in the level of term

loan will mean that some more long-term funds have been generated. Correspondingly, any decrease in the

level of term loan will signify that a portion or instalment of the term loan has been paid back to the bank, or

to the financial institution, which, in turn, means that an outflow of long-term funds has taken place, which,

in fact, constitutes the application (use) of funds.

In a similar manner, an increase in the level of fixed assets will mean that some more items of machinery,

have been procured, involving a certain outflow of long-term funds, signify the long-term application or use

of funds.

It will augur well if, at this stage, we give a detailed illustrative (and not comprehensive) list of the various

major items of short-term and long-term sources and uses (application) of funds, in a tabular form, as in Table  7.1.



RATIONALE BEHIND EXCLUDING CASH

Cash – either in hand, or at bank, or in transit – is an item of current assets (nay, quick assets). Also, as we

have seen earlier, any increase in the assets is an application (use) of funds, and any decrease in assets is

a source of funds. Therefore, by implication, any decrease in cash will amount to source of funds. Based on

this principle, any amount of cash that we dump in the sea or down the drain, will result in more and more

generation of sources of funds. Therefore, to obviate such a fallacy, any change in the cash portion is not

taken into account.

Instead, the net difference in the aggregate short-term and long-term sources and application (uses)

sides of the funds flow statement, will match with the corresponding increase or decrease in the level of

cash. Further, when the difference in the level of change in cash matches with the corresponding change

in the cash flow statement, it certifies that our computation is correct, at least in terms of its arithmetical

accuracy.



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FINANCIAL MANAGEMENT: THEORY AND PRACTICE



TABLE 7.1  Source and Uses (Application) of funds: (A) Long-term and

(B) Short-term Sources and Application (Uses) of Funds





Long-term Sources of Funds



Long-term Application (Uses) of Funds















(A) Pertaining to Long-term (Non-Current) Liabilities

Increase in Reserves and Surplus

Decrease in Reserves and Surplus

Increase in Share Capital

Decrease in Share Capital

Increase in Term Loans

Decrease in Term Loans

Increase in Debentures

Decrease in Debentures

Increase in Public Deposits (of over 12 months)

Decrease in Public Deposits (of over 12 months)

(A) Pertaining to Long-term (Non-Current) Assets











Decrease in Fixed Assets

Decrease in Miscellaneous Assets

Decrease in Intangible Assets



Increase in Fixed Assets

Increase in Miscellaneous Assets

Increase in Intangible Assets







(like Miscellaneous expenditure and losses)



(like Miscellaneous expenditure and losses)







Short-term Sources of Funds















Increase in short-term bank

finance (like working capital loans)

Increase in Public Deposit of

less than 12 months

Increase in Provisions



Short-term Application (Uses) of Funds



(B) Pertaining to Short-term (Current) Liabilities

Decrease in short-term bank

finance (like working capital loans)

Decrease in Public Deposit of

less then 12 months

Decrease in Provisions



(B) Pertaining to Short-term (Current) Assets







Decrease in the level of inventories of

raw materials, work-in-progress,



Increase in the level of

inventories of raw







and finished goods



materials, work-in-progress and finished goods



CASE STUDIES WITH SUGGESTED APPROACHES

With a view to bring home the various concepts and principles pertaining to the cash flow/funds flow statements,

i.e. involving the study of the changes in the sources and application (uses) of funds, both short-term and

long‑term, we will now proceed on to work out some case studies.



SOURCES AND APPLICATION (USES) OF FUNDS STATEMENTS







113



CASE STUDY I



Rashtriya Chemicals Limited (RCL)

TABLE 7.2 The Balance Sheets of Rashtriya Chemicals Limited (RCL)

as on 31 March, 2009 and 2010

(` in lakh)

Particulars

Liabilities

Share capital

Reserves and Surplus

Debentures

Sundry creditors

Working capital loan

from banks

Accrued expenses

Income tax payable

Total Liabilities

Assets

Net-fixed assets

Investments

Cash-in-hand and in bank

Sundry debtors

Inventories

Pre-paid expenses

Total Assets



2010



2009



1,400

1,005

750

210

120



700

758

900

229

112



50

300



36

180



3,835



2,915



1,800

400

525

310

785



800

280

750

375

692



15



18



3,835



2,915



TABLE 7.3 Profit and Loss Account of Rashtriya Chemicals Limited (RCL)

for the Year ended 31 March, 2010

(` in lakh)  

Particulars

Net sales

Cost of goods sold

Gross profit

Depreciation

Other operating expenses



3,400

1,920

1,480

140

640



Interest paid



780

700

60



Profit before tax (PBT)

Provision for income tax



640

293



Profit after tax (PAT)

Dividend

Balance transferred to Balance Sheet



347

100

247



114



FINANCIAL MANAGEMENT: THEORY AND PRACTICE



The Balance Sheets of Rashtriya Chemicals Limited (RCL) for the two consecutive years (2009 and 2010)

and the Profit and Loss Account for the year 2010 have been given in Tables 7.2 and 7.3, respectively.

(i)You are required to prepare the statement of Sources and Application of funds for the current year.

(ii)Also, you are to evaluate the financial performance of the company, and make required recommendations,

with reasons, to the company, with a view to improving upon its performance and prospects.

Step 1: At the very outset, we should compute the increase or decrease that might have occurred in the

respective items of current and non-current assets and liabilities, during the current year, in comparison to

the previous year.

Step 2: Thereafter, we may group all these items under two different columns of Sources and Application

(uses) of funds. While doing so, we should distinctly bear in mind the cardinal principle that any increase in the

liabilities means a generation or sources of funds, and accordingly, any decrease in the liabilities may result

in their application.

Similarly, any increase in the assets results in an application of fund, and any decrease in assets leads to

a generation or source of funds.

Step 3: We shall now compile the figures in the respective columns of sources of funds and application of

funds, which have again been further classified under the short-term and long-term sources and uses of funds,

as has been shown in Table 7.4.

TABLE 7.4  Source and Application (Uses) of Funds

Sources of Funds

(A) Long-term Sources

Share capital

Reserves and surplus

Term loans and

Debentures

Total (A)



Application of Funds

Long-term Application

Net fixed assets

Long-term investments



(B) Short-term Sources



Short-term Application



Cash credit loans

Sundry creditors

Total (B)

Total (A) + (B)



Short-term investments

Sundry debtors



As you may observe from the broad format/framework given in Table 7.4, the usual items of assets and

liabilities have been placed under the respective columns, meant for sources or application of funds. But then,

these items will not necessarily be shown under such columns. These will, instead, be shown in the respective

columns appropriately, based on the increase and decrease arising in these items of liabilities and assets, and

accordingly, whether such changes signify sources or application of funds.

Step 4: We would now compute the figures with the following small but significant additions/ alterations, made

in the pattern shown in Table 7.4, so as to fit into the format, usually prevalent in actual practice, presented

in Table 7.5.



SOURCES AND APPLICATION (USES) OF FUNDS STATEMENTS







115



TABLE 7.5  Sources of Funds Application (Uses) of Funds

Sources of Funds



Application (Uses) of Funds



(A) Long-term Sources



Long-term Uses (Application)



Profit after tax (PAT)

Depreciation (and other Non-Cash Expenses)

All other items of long-term sources

Total (A)



Dividend paid

Gross fixed assets

All other items of long-term uses



(B) Short-term Sources



Short-term Uses (Application)



All items of short-term sources

Total (B)

Total (A) + (B)



All items of short-term uses



We will now examine the main changes that have been incorporated in the usual format.

Instead of projecting just the amount of retained earnings transferred to the Balance Sheet, the entire amount

of Profit After Tax (PAT) has been taken on the long-term sources side. Accordingly, to present the net amount

of reserves and surplus, the amount of dividend has been shown separately on the long-term application side.

A question may naturally cross our mind, as to what is the rationale behind such refinement. The rationale,

in my considered opinion, seems to be as follows.



Rationale

This way, we would know as to what is the amount of PAT and what percentage thereof has been paid out as

dividend. Since the lesser the percentage of PAT paid out as dividend, the better, in that it may signify that the

company intends to expand its business and remain in the business for a longer period of time. For example,

SBI, RIL, RPL, L&T, Ranbaxy, retain and plough back a much larger portion of their PAT, in their business.

Similarly, if the percentage of the dividend paid, instead, is higher enough, it may go on to suggest that the

company prefers to always remain in its readiness to close down its business here and go back to its homeland

or to shift to some other country, if the circumstances may so warrant. Take, for example, the case of Colgate

and Palmolive. This company, being a foreign company, wants to play safe and pays out a larger portion of its

PAT as dividend, so that, in case due to some political or economic reasons it finds it prudent and pragmatic to

close down and shift over to some other country, it may not stand to lose much of its assets and the shareholders’

wealth, most of which may be belonging to the foreign investors.

The second refinement/change, which has been incorporated in this format prevalent in the usual practice,

is that instead of showing just the net fixed assets, the gross fixed assets have been shown under the column

meant for the application (uses) of funds. Generally speaking, there may be the case of increase in the level

of gross fixed assets. If, however, there is a decrease in the gross fixed assets level, it will naturally be shown

under the sources column (i.e. on the left hand side). But then, the amount of depreciation, provided during the

current year, has got to be shown under the column of sources of funds alone, inasmuch as this item pertains

to the non-cash expense for the current year.

Further, the rationale behind such refinement also seems to be based on the fact that the amount of

depreciation does not really represent any inflow of funds. In fact, a much larger amount than the amount

of depreciation, accounted for this year, has already been spent in some earlier year(s), at the time of the

purchase of the (gross) fixed assets. It is only being accounted for in a phased manner in instalments, by way

of depreciation, over the years thereafter. In such a manner, this special feature of depreciation will always be

borne in mind, while analyzing and interpreting the end result of the computation of the sources and uses of

funds statements, as in reality, there is no inflow of funds by way of depreciation this year.



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FINANCIAL MANAGEMENT: THEORY AND PRACTICE



We will now move on to compute the relative figure given in the case study of the Rashtriya Chemicals

Limited (presented earlier in Tables 7.2 and 7.3), on the pattern of the format, presented at Table 7.5, above,

as has been presented in Table 7.6.

TABLE 7.6  Sources and Applications of funds Statement of Rashtriya Chemicals Limited

(` in lakh)

Long-term Application (Uses) of Funds



(A) Long-term Sources of Funds

Funds from Operations

PAT

Depreciation

Share capital

(1,400 – 700) = (+) 700

Total (A)



347

140



700



Dividend

Gross fixed assets

(NFA + Depreciation)

[1800 (–) 800] + 140 = (+) 1140

Investments

(400 – 280) = (+) 120

Debentures

(750 – 900) = (–) 150



Total (A) + (B)



150



Short-term Application (Uses) of Funds



(B) Short-term Sources of Funds



Total (B)



120



1,510



1,187



Working capital loan from banks

(120 – 112) = (+) 8

Income tax payable

(300 – 180) = (+) 120

Accrued expenses

(50 – 36) = (+) 14

Sundry debtors

(310 – 375) = (–) 65

Prepaid expenses

(15 – 18) = (–) 3



100

1,140



8



Sundry creditors (210 – 229) = (–) 19



19



Inventories

(785 – 692) = (+) 93



93



120



14

65

3

210



112



1,397



1,622



From Table 7.6, we observe that the difference between the aggregate sources and uses of funds is 1397 less

1622, which comes to (–) 225. This figure corresponds with the decrease in cash (i.e. 750 less 525 = 225), which

has not been taken into account in our computation, and rightly so, for the reasons already explained earlier.

This goes to indicate that our computation is all correct, at least arithmetically.

We will now proceed to critically examine and analyze, evaluate and comment upon, the financial performance

and prospects of the company, and make some suggestions to improve upon its financial performance in the

respective areas, wherever considered necessary.



Evaluation*

While critically evaluating our findings in regard to the cash flow/funds flow statement, we should first try to

find out whether there had been any diversion of funds. In other words, whether any portion of the short-term

sources of funds has been diverted for the purpose of any long-term application. This is so, because the banks

and financial institutions insist that their short-term loans, like the working capital loans, should be used

(Please note that there is ‘No Single Approach’ to a case study.)

*  One of the approaches to the case study; as suggested by the author.







SOURCES AND APPLICATION (USES) OF FUNDS STATEMENTS



117



only for the specific purpose for which these have been granted, and not for diverting these for building any of

the fixed assets, like land and building; plant and machinery, The case of JK Synthetics is a live illustrative

example in this regard. This company had used a portion of its working capital finance for paying duty on some

imported items of machinery and had, consequently, invited the wrath and distrust of the State Bank of India.

(Incidentally, as against this, the use of long-term sources of funds for any of the short-term applications is

not viewed with any disfavour. Instead it is welcome).

In the instant case, we find that the total long-term sources of funds at ` 1,187 lakh are far short of the total

long-term application of funds at ` 1,510 lakh (the net short fall being to the tune of ` 323 lakh). This obviously

is an indication of the fact that, a portion of the short-term sources of funds have been diverted for some longterm application. True. But then, we should not come to a quick conclusion that, it might have necessarily

resulted in the (malady of) diversion of funds, as aforesaid. Instead, we should, in such cases, invariably go on

to compute the current ratios for both the years.

Here we find that the Current Ratio (Current Assets ÷ Current Liabilities) during the previous year at 3.29

(1835 ÷ 557) has gone down to 2.40 (1635 ÷ 680) during the current year. But then, we all know that, by the

Indian standards, and based on the erstwhile guideline of the Tandon Committee Report, the minimum current

ratio of a company was stipulated at only 1.33 : 1.00. Instead, in this case, it has come down from 3.29 to 2.40,

which again is well above the minimum required level of 1.33. Furthermore, as we also know that, too high a

current ratio may signify a higher build-up mainly of inventories and sundry debtors, both of these being an

avoidable drain on the profitability of the company, as these involve higher inventory carrying cost, and loss

of interest on the funds blocked in the sundry debtors.

Thus, from this point of view, the current ratio of the company has come down from a far higher level of

current ratio at 3.29 to a relatively lower level at 2.40, which is a welcome improvement in the right direction.

Under the circumstances, we may conclude that, though there has been an (usually undesirable) application

of short-term sources for long-term uses, it has not actually amounted to any diversion of funds.

In fact, the company may be well advised to bring down its current ratio well within the desirable minimal

level of 1.33. This requires a thorough probe of the factors that may be responsible for such state of affairs,

which, most probably, may include the inventories and sundry debtors, and of course, cash (in hand and in

banks) which is quite a heavy amount at ` 750 lakh for the previous year and ` 525 lakh this year. Effective

steps need to be taken by the company to gainfully invest its surplus cash in some safe avenues for a desirable

period of time, depending upon its cash requirements in the near future.

We will now proceed to critically examine the other factors/features of the company.



Dividend

Out of the PAT amount of ` 347 lakh, a sum of ` 100 lakh (i.e. 28.82 per cent) has been paid by way of dividend.

This seems to be a satisfactory feature. But then, the company seems to have gone for a large-scale expansion

and modernization programme, which is evident from the fact that the company’s fixed assets (plant and

machinery) have gone up by ` 1,000 lakh this year. It is for the consideration of the company to re-examine,

whether it could have declared a lesser amount by way of dividend, in view of its massive expansion programme,

which, in turn, would have ultimately led to an overall increase in the shareholders’ wealth. But, while doing

so, due care must be taken to see to it that, such a reduction in the quantum of dividend paid, should not be

far lower than its level in the previous year(s), thereby having some unwanted and unwarranted adverse effect

and ramification on the market price of its shares in the stock exchange(s), and its overall rating and standing

in the eyes of the general public.



Inventories

The level of inventories has gone up from ` 692 lakh to ` 785 lakh, which needs to be thoroughly probed, as

any undesirably high build up of inventories may result in avoidable higher inventory-carrying cost, which in

turn, may eat into the net profitability of the company, as also its prospects.

A thorough and strict scrutiny of its inventories [including its age-wise analysis on the basis of FSN (fastmoving, slow-moving and non-moving) analysis], must be undertaken at the earliest, with a view to shedding



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FINANCIAL MANAGEMENT: THEORY AND PRACTICE



some of its slow-moving and non-moving items, by adopting some marketing strategies like discount sales

and bulk discount, Further, fresh purchases of the items, which are already built-up in a larger quantity than

reasonably required, must be suspended till the stocks come down to the normal reorder level.



Investment

There is a steep increase in the quantum of investment this year (from ` 280 lakh to ` 400 lakh, i.e. an increase

of ` 120 lakh over ` 280 lakh, which represents an increase of around 43 per cent). This item, therefore, needs

a closer look, with a view to examine the desirability of disinvesting some of the amount for reinvestment in

some other more gainful avenues, or else to be ploughed back into the business.

Sundry Debtors and Sundry Creditors

The decline in the level of sundry debtors (from ` 375 lakh to ` 310 lakh) is a welcome development. The level of

sundry creditors has also come down, but only marginally, i.e. from ` 229 lakh to ` 210 lakh. But then, it would

augur well if the level of sundry debtors is further brought down to match with the level of sundry creditors,

so as to have a balanced trade off between the two.



Working Capital Loan

The level of the outstandings in the working capital loan is marginally higher, which is considered to be normal.



Share Capital and Debentures

Share capital has doubled from ` 700 lakh to ` 1,400 lakh. We must enquire whether the shares have been

issued at par or at a premium. Also, if the premium is substantial or even reasonable, the cost of fund may be

relatively lower.

As against this, the level of debentures has come down by ` 150 lakh, which might have been due to its partpayment having fallen due, which is a good business sense.



Conclusion

All considered, the company needs to pay some special attention to the management of its inventories, on top

priority basis.

We shall now attempt to work out the Cash Flow/Funds flow statements, pertaining to some other companies

also, in order to reinforce the concept and the lines of analysis and evaluation of the financial performance of

the respective companies.

Further, as we have understood the detailed procedures, step by step, for computing the Cash Flow/Fund

Flow statements, we will now prepare the final statements, without going into the detailed, step-by-step,

calculations and computations.



SOURCES AND APPLICATION (USES) OF FUNDS STATEMENTS







119



CASE STUDY II



Reliable Automobiles Limited (RAL)

From the following Balance Sheets of Reliable Automobiles Limited (RAL) (Table 7.7) as on 31 December, 2008

and 2009, as also the relevent figures from the Profit and Loss account of the company, prepare the sources

and application of funds statement of the company for the current year.

TABLE 7.7  Balance Sheets of Reliable Automobiles Limited as on 31 December, 2008 and 2009

(` in lakh)





Particulars



20082009











Sources of Funds (Liabilities)

Share capital

Profit and Loss Account (Retained Earning)



250

356



200

330









Shareholders’ funds (CRS or OE)

Long-term loans



606

30



530

80



Total

636



Application of Funds (Assets)



Fixed assets:



Freehold land at cost

380



Plant and equipment



– Cost

275

240



– Depreciation

145

130

120









Motor vehicles

120

– Cost

135

– Depreciation

85

50

60



610



320



120



60





Total (Net) Fixed Assets (A)

560

500



Current Assets

Inventories

160

70



Sundry debtors

120

65



Cash in hand and at bank

nil

125



Total Current Assets

280 260

Less: current liabilities



Sundry creditors

125

150



Working capital loan

79





Total Current Liabilities

204 150





Net current Assets (B)







Total (A + B)



76 110

636



610



The net difference between the sources and uses of funds, as shown in Table 7.8, is (205 – 330) = (–) 125. This

figure agrees with the net decrease in cash (NIL – 125) = (–) 125. Thus, the above computations are correct,

though only arithmetically.



Evaluation*

At the very outset, we observes form Table 7.8, that the long-term sources are short by ` 34 lakh (` 160 lakh

less ` 126 lakh), which may suggest that some short-term funds, to the tune of ` 34 lakh, have been used for

(Please note that there is ‘No Single Approach’ to a case study.)

*  One of the approaches to the case study; as suggested by the author.



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FINANCIAL MANAGEMENT: THEORY AND PRACTICE



building up some fixed assets, or for some other long-term application. Such being the case, it would amount

to diversion of funds, which, in turn, is viewed with great concern and disfavour by the banks and financial

institutions.

TABLE 7.8  Sources and Application of Funds Statement of

Rashtriya Automobiles Limited as on 31 December, 2009





Sources of Funds



Application of Funds



(A) Long-term Sources



Long-term Applications





Retained earning [PAT (–) Dividend]

26

Dividend (The figure of



(356 – 330) = (+) 26

dividend paid has not been



given in the case separately,



only the net retained earning



has been given.)



Depreciation

50

Gross fixed assets



(145 + 85) – (120 + 60) = (+) 50

(380 + 275 + 135) – (320 + 240 + 120)



or (790 – 680 = (+) 110



Share capital

50

Term loan paid



(250 – 200) = (+) 50

(30 – 80) = (–) 50



Total (A)

126

(B) Short-term Sources



110

50

160



Short-term Applications





Working capital loan

Inventories



(79 – 0) = (+) 79

79

(160 – 70) = (+) 90



Sundry debtors



(120 – 65) = (+) 55



Sundry creditors



(125 – 150) = (–) 25



Total (B)

79



170







330



Total (A) + (B)



205



Total (A) + (B)



90

55

25



But, before coming to a final conclusion, we should first calculate the current ratio, so as to see whether it

has dropped below the required minimum of 1.33 or so. Here, we find that the current ratio has come down

from 1.73 (260 ÷ 150) to 1.37 (280 ÷ 204), which is well above the minimum of 1.33. This is so, because this

was earlier stipulated as minimum, 1.3 : 1 by the Tandon Committee, which has, by now, remained just like

an optional guideline, rather than the compulsory directive. Thus, we may come to a fair and firm conclusion

that no diversion of funds has actually taken place.

Now, we will go on to analyse and evaluate the changes under different heads.



Dividend

As the figure of dividend paid has not been given separately in the case, and instead, the net retained earnings

that has been ploughed back in the business, has been stated, we may not be able to comment on the fact

whether the quantum and percentage of dividend paid, in relation to the PAT, is either reasonable or very

much on the higher side.



Shares vs Term Loan

It has been observed that the company has issued fresh shares to the extent of ` 50 lakh, which seems to have

been used for the repayment of the term loan, which has gone down by an equal amount. Here, one may like

to see, whether it is the right financing policy for the capital structure of the company, specially because of the

fact that, while the interest paid on the term loan is tax-deductible, the dividend paid on the share capital is



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